Animal instincts
By John Authers October 15 2009 Financial Times

For years, the hedgehogs have ruled the foxes in the investment world. It may be time for a change.

The distinction between hedgehogs and foxes comes from the late philosopher Isaiah Berlin, who divided history’s great intellectuals into two camps. Hedgehogs understood one big idea, which suffused their view of the entire world. Foxes had different influences, and a more nuanced or complex view of the world. Neither is meant as a term of abuse. Shakespeare, according to Berlin, was a fox. Plato was a hedgehog. There is a place in intellectual history for both.

There is also a place in investing for both. Foxes look around different markets, in search of inefficiencies to exploit. Meanwhile hedgehogs view the world from the top down, and decide where to invest using one overarching theory.

As a rule, markets are fairly efficiently priced most of the time: each will have few obvious bargains, and the prices available in bonds, stocks and commodities will be consistent with each other.

Foxes do well in such an environment. Researching the quirks of the markets, they may find bargains, or securities that at least do better than the benchmarks. Arguably, the most successful investment managers have been foxes.

But this decade, the hedgehogs have prospered. One big idea – if it is the right one – applied across all markets has been enough to make profits. This has been “decoupling”: the notion that the big emerging markets, led by Brazil, Russia, India and China, could grow independently of problems in the developed world. That meant buying the stocks and bonds of emerging countries, and their currencies, along with the commodities they were producing and consuming. Decoupling in turn implied the “great moderation” – that interest rates could stay very low in the developed world without precipitating inflation. This led to buying bonds and, of course, credit.

The next big idea could perhaps be called the “doomsday scenario”. The lending binge had gone too far: commodity prices had been driven up, and were bound to depress economic activity. And so hedgehogs who had the idea that the world was ready to fall, and were prepared to bet on it, profited as the financial crisis unwound.

Another hedgehog idea has driven everything for the last six months. The positive take on this is “re-decoupling”; the belief that as markets have recovered, so China and the emerging markets will pull the world through. More realistically however, the idea has been “follow the herd”.

By March, the panic was overdone. Some hedgehogs took off their negative bets, sparking recoveries in different markets. But investors who have bet on the recovery since this time tend to talk about mass behaviour, not the economy.

They argue that investment managers need to be “in” the market. The longer the rally goes on, the more embarrassing it becomes to have missed out, and the more likely they are to capitulate and buy – even as the higher prices rise. The rally, on this argument, has been driven by career risk for investment managers, rather than by the risks of the investments themselves.

In all cases, though, what is interesting is that these big ideas were able to swamp the nuances visible to experts in individual markets. Oil kept rising long after it was obvious to professional oil investors that the price could not possibly be justified by normal fundamentals, for example.

How could hedgehogs conquer to this extent? Over the decades, financial innovation has opened up new asset classes such as foreign exchange, commodities, and credit, which have now been “marketised”, enabling a hedgehog to bet on the same big idea in different markets. The insane cheapness of leverage finance in the middle of this decade allowed them to make those bets many times over with borrowed money. And so the world markets came to move, in unison, on the latest big idea.

Experienced investors in fields as distinct as credit and oil still complain that their markets are dominated by “off-piste” investors who do not understand the subtleties of their investments.

But at some point, hopefully soon, markets should adjust to a painful “new normal”. Once they are in some kind of workable equilibrium, foxes may be able to make a killing once again.

instincts definition ,what is Instinct

lnstinct is the inherent disposition of a living organism toward a particular behavior.

Instinctual actions - in contrast to actions based on learning which are served by memory and which provide individually stored successful reactions built upon experience - have no learning curve, they are hard-wired and ready to use without learning. Some instinctual behaviors depend on maturational processes to appear.

Instinctive behavior can be demonstrated across much of the bro